Sunrise Market Commentary
- Rates: Fed speakers wildcard, but neutral trading expected
Today’s eco calendar is empty suggesting more low volume trading in tight ranges. Speeches by Fed governors are wildcards for trading. Chicago Fed Evans stroke a dovish note overnight, but the US Treasury market didn’t reverse losses after ‘hawkish comments’ by influential NY Fed Dudley yesterday - Currencies: dollar extends cautious rebound
Yesterday, the dollar gained more ground on hawkish Fed comments and on a forceful equity rebound. Central bankers comments and equities will remain the drivers for USD trading today. The USD rebound may slow if Fed governors bring no additional supportive news.
The Sunrise Headlines
- Asian stocks trade mixed with Japan outperforming on weaker yen & strong tech stocks. Other Asian bourses are narrowly mixed and ignore WS strong run yesterday (S&P/Dow fresh record highs).
- China’s economic growth is expected to fall below the government’s 6 per cent target in 2018 and 2019, according to Fitch, reflecting the increasing challenge of supporting growth given a higher level of indebtedness.
- Oil is little changed at $44.2 a barrel. Crude has now fallen for four weeks straight as U.S. drillers continue to add rigs, blunting OPEC-led efforts to rebalance an oversupplied market.
- Chicago Fed Evans said that the low-inflation environment supports very gradual hikes and slow, pre-set reductions in the BS. He stressed downside risks to the inflation outlook and that the inflation target is not a ceiling.
- Germany PPI was a tad below consensus in March at -0.2% M/M and 2.8% Y/Y, down from 3.4% Y/Y in April. It confirms the general move that inflation is currently rolling over after the sharp rise some months ago.
- Michel Barnier warned Britain that the EU would not make concessions after the first day of Brexit negotiations. EU’s chief negotiator replied: ‘I am not in a frame of mind to make concessions, or ask for concessions. We are implementing the decision taken by the UK to leave the EU’
- Eco-calendar is again dominated by Fed-speakers (Fischer, Rosengren and Kaplan). There are no other market-important moving data coming out
Currencies: Dollar Extends Cautious Rebound
USD rises on Fed-comments and equity rebound
Trading in the major FX cross rates took a very slow start to the new week. The swings of EUR/USD and USD/JPY were negligible in the morning session. In the US session, the dollar received support from positive comments of Fed’s Dudley and from further equity gains. EUR/USD drifted to the mid 1.11 area and closed the session at 1.1149 (from 1.1198). USD/JPY finished the day at 111.53 (from 110.88).
Overnight, Asian equities traded mixed. Japanese stocks outperform supported by an ongoing positive sentiment in the tech sector, nearing the highest level in almost two years. Fed’s Evens spoke more cautious than Dudley, but the dollar maintains yesterday’s gains against the euro (EUR/USD 1.1155 area) and even gained slightly against the yen (111.70 area). According to the June Minutes, the RBA expects continued growth in employment to reduce spare capacity, but the RBA also monitors risks of rising indebtedness. The Aussie dollar trades with a slightly negative bias, but this is probably still due to yesterday’s Moody’s downgrade of the banking sector. AUD/USD struggles not to fall below 0.76.
Today, there are again only second tier eco data in the US and Europe (current account). Currency traders will again look for clues from equities and from central bank speakers, including Fed’s Fisher, Fed’s Rosengren and Fed’s Kaplan. Some Fed members turned more cautious, but we expect Fisher to support Yellen’s normalisation approach. If so, it might be slightly USD supportive. Asian equities and the US futures indicate an ongoing constructive risk sentiment, but the pace of the rally might slow. The Macron victory is probably fully discounted and we’ll have to see how far the tech rebound still has to go.
After last week’s relatively hawkish Fed statement, the topside in EUR/USD looked better protected and a cautious sell-on upticks approach was advised. We hold on to that view. However, sustained USD gains need better US eco data, supportive Fed comments and/or higher US yields. The dollar received that support yesterday to some extent. However, there are few high profile data in the US this week. If the equity rally slows, so might the USD rebound. To monitor the USD momentum, we especially keep an eye at USD/JPY. Recently the USD/JPY performance was mediocre even as several equity indices are trading near record levels. The post-Fed performance was a bit more solid but the pair wasn’t able to regain any important resistance yet.
Technical picture
The USD/JPY rally ran into resistance in early May. A mini sell-off mid-May made the short-term picture negative, driving the pair further down in the 108.13/114.37 range. The post-Fed USD rebound pushed the pair beyond a first minor resistance at 110.81. A break beyond the 112.13 correction top would improve the ST-picture. The day-to-day sentiment improved of late, but we remain cautious to forecast a U-turn.
Early May, EUR/USD failed to break below the 1.0821/1.0778 support (gap). Poor US data and US political upheaval propelled EUR/USD north of the 1.1023 range top to a corrective top. The pair tested the 1.1300 area going into the FOMC decision, but the test is rejected. So the Trump top/correction top at 1.1300/1.1366 proved to be a solid resistance. USD sentiment will have to become really negative to clear this hurdle. EUR/USD 1.1110 is a first minor support. A return below 1.1023 would indicate that the upside momentum has eased.
EUR/USD: test off 1.1300/66 resistance rejected, but correction remains limited for now
EUR/GBP
Sterling rebound slows
Yesterday, UK’s Brexit Minister Davis and EU’s Barnier started the formal Brexit negotiations,. The impact on sterling trading was limited. The first official remarks of UK’s Davis were reconciliatory and created the impression that the UK aims a softer Brexit than expected before the UK election. However, The jury is still out as the domestic political situation in the UK remains highly uncertain. Silvana Tenreyro was appointed to the BoE MPC to replace Kristin Forbes. She might be more dovish than Forbes. EUR/GBP closed the session little changed at 0.8752.
There are no eco data in the UK today. Sterling traders will keep an eye at a Speech of BoE governor Carney. After last week’s vote split BoE vote, markets will look out how much weight Carney will give to the recent inflation uptick. We expect Carney to be rather balanced. A cautious tone might be slightly negative for sterling. Markets will also keep an eye at the comments commenting for the Brexit negotiations. It looks like Europe is determined to hold on to its agenda. The pressure on sterling eased at the end of last week, but we don’t expect a sustained rebound.
From a technical point of view, EUR/GBP extensively tested the 0.8854 area (2017 top), but a real break didn’t occur. Some consolidation might be on the cards after last week’s post BoE EUR/GBP correction. However, the broader technical picture hasn’t changed. A return below the 0.8655 correction low would be an indication that the pressure on sterling is easing. Such a break will be difficult. A EUR/GBP buy-on-dips approach is still favoured.
EUR/GBP stabilizes as Brexit negotiations formally start
